Australia & the World on two pages – June 2014

The generally upward trend in advanced economy purchasing manager surveys began to fade through late 2013 and 2014 and that has been followed by a levelling out in the rate of growth in world trade and industrial output.

Global: The generally upward trend in advanced economy purchasing manager surveys began to fade through late 2013 and 2014 and that has been followed by a levelling out in the rate of growth in world trade and industrial output. Growth in North America should pick up following the disruption caused by the harsh winter. Policy is becoming more positive for growth in the Euro-zone and the UK economy looks set to continue a solid recovery. While Japanese demand has to adjust to the imposition of a higher indirect tax rate, the underlying economic situation looks far better than it did after previous tax hikes. Among the emerging economies, China is slowing and while an upturn is expected across the rest of East Asia and Latin America, there is little sign of it yet. Overall, global growth should be around trend this year and above trend in 2015.

The Fed is still cutting its asset purchases (“tapering”) at a rate that should see the programme finish late this year. Interest rates look set to stay between zero and 0.25% for “a considerable time” and we expect the first rise in mid-2015. Central banks in Japan and the Euro-zone are focussed on combating deflationary risks which points to loose monetary policy for a long time to come. Facing well below-target inflation and a risk of deflation, the European Central Bank has announced lower policy lending interest rates, negative rates for banks depositing money with it, an assurance of low cost funding to the banking system, a scheme to encourage commercial bank lending to business borrowers by providing low cost funds to banks and further preparatory work on central bank asset purchasing. The aim is to prevent the Euro-zone falling into a Japan-style deflation.

The levelling out in business sentiment shown in the purchasing manager surveys for the industrial sectors of the big advanced economies has been reflected in their output. The trend 3-month annualised growth rate of industrial output in the advanced economies stabilised at around 4% through the first few months of 2014, a change from the ramping up in growth seen through 2013. The comparable measure of industrial growth in the emerging market economies has continued to slow. Taken overall, there has been a significant slowing in the pace of growth of the biggest advanced economies since mid-2013. Annualised growth in the G7 peaked at around 2½% in June and September 2013, falling to just under 2% in December and around 1% in March 2014. Part of this slowdown reflected the harsh winter conditions in North America (which contributed to a fall in US output) but there was also a disappointingly weak GDP outcome in the Euro-zone. The pull-forward of spending in Japan to beat the April tax rise offset some of the weakness in other big advanced economies.

The monthly purchasing manager indices (PMIs) confirm this mixed picture across the big advanced economies. The level of Japanese economic activity has fallen since the indirect tax change but the manufacturing and services PMIs have recovered some of their April losses, suggesting that the economy is holding up better than it did in the wake of the 1990s tax hikes and supporting the Government’s view that the recent tax rise should not de-rail growth. In the US, the PMIs point to ongoing moderate growth, smoothing out the bad weather related volatility seen in the national accounts and monthly “hard” economic data. UK PMIs show strong growth but Euro-zone indices are less buoyant.

The slowing trend in the big emerging economies continued into the early months of 2014 with a virtual stagnation in the level of their industrial output after a long period of solid growth. This lines up with the levelling off in import and export volumes and the weakness in their recent business surveys. Emerging Asian industrial growth was down to around 1½% yoy, in Latin America it was near zero (Brazil was negative) while Indian growth was negative. China is the exception to this picture of modest industrial expansion, its growth is slowing but (at almost 9% yoy) it remains far stronger than any other big global economy.

Forward looking questions in the business surveys of big advanced economies show growth is expected to continue at a moderate pace but they no longer point to growth accelerating. Our forecast is for advanced economy growth to pick up from 1.3% in 2013 to 1.9% this year and around 2.3% through 2015 and 2016. Turning to the emerging economies, growth is expected to stagnate at around 5½% between 2014 and 2016 – slightly slower than the late 2013/early 2014 rate. Trends are mixed across these economies with China expected to slow, India to pick up (after a long disappointing period) and a modest acceleration in Latin America and emerging Asia. Global growth is expected to reach 3.4% this year, close to its 35 year trend rate, and rise to an above-trend 3.7% in 2015.